so just to confirm.I order my 3g iphone from vodafone website at the full price without any plan. It comes in three days. I open it, put in my prepay sim card, and what does it do? Does it need any activating, or will it work straight out of the box? Sorry, just dont want to end up with a $1200 dud.

Once your simcard is in the phone and you turn it on it will ask you to connect the phone to your computer and open iTunes.
iTunes will then walk you through the activation process (which takes no time at all) which will then allow you to use the phone.

Because you are using a prepaid simcard only Voice and TXT will work to start with, to get data working refer to freitasm's post above